THE DEAL IS DONE: LVMH SCOOPS UP DONNA FOR $643 MILLION
Byline: Lisa Lockwood / With contributions from Miles Socha, Paris / Eric Wilson, New York
NEW YORK — “Donna Karan Paris sounds good!” said an ecstatic Donna Karan Monday morning, after LVMH completed its $643 million deal to buy her design and licensing company.
This confirms a report on page 2, April 2 that Donna Karan International and LVMH were expected to finalize their deal Monday.
Three and a half months after receiving a proposal, DKI signed a definitive merger agreement with LVMH to acquire all of the outstanding common stock of DKI for $10.75 per share in cash, or approximately $243 million, 25 cents a share more than even the highest speculation. This represents a premium of 26 percent over the $8.50 price initially proposed by LVMH, and a 120 percent premium over DKI’s closing stock price on Dec. 15, 2000, the day before LVMH submitted its original merger proposal. Shares of DKI closed at $10.41 on the New York Stock Exchange Monday, up $1.43, or nearly 16 percent.
Upon closing, DKI will be combined with Gabrielle Studio Inc., the licensor of the Donna Karan trademarks that was owned by Karan and her husband, Stephan Weiss. LVMH acquired Gabrielle Studio on Jan. 17 for $450 million. However, as an incentive to get the DKI deal done quickly, Karan and Weiss agreed to reduce the price of Gabrielle Studio by $50 million if the DKI acquisition was completed by June. That $50 million more than offsets the extra $2.25 a share that LVMH ponied up to the the public shareholders of DKI.
Consequently, LVMH ends up paying $400 million for Gabrielle Studio and $243 million for DKI, totaling $643 million for the whole package.
DKI, whose revenues last year were $662.7 million, is the latest in a string of LVMH acquisitions that includes Bliss, Hard Candy, Tag Heuer, Ebel, Thomas Pink, BeneFit Cosmetics and a 51 percent joint purchase in Fendi with Prada.
“It’s a new chapter of my life. It opens a fresh page,” Karan, chairman and chief design officer of DKI, told WWD in an exclusive interview. “It’s extraordinary for the company. I spent a long time on this, it wasn’t done overnight. It was a process, and my comfort zone began to rise as I realized LVMH understood my dream and could build upon it. We were both on the same page. Since I started the company, my intention was to become a global luxury goods house, from the first alligator bag I made.”
“For me, it’s a very happy day,” said Yves Carcelle, head of LVMH’s fashion and leather goods business group. Arriving back in Paris from Tokyo on Monday, Carcelle said the special committee of DKI and board members hammered out the new purchase price Friday and the contracts were completed Sunday night, with Carcelle signing documents via fax.
Karan will continue as chief designer and retain her creative leadership in the combined entity. Karan and Weiss have agreed to exchange a significant portion of their DKI shares for, and intend to purchase 14.3 percent of, the new entity, and LVMH will own the balance. LVMH plans to continue to operate DKI as an autonomous lifestyle company in the LVMH Fashion Group.
Karan said she has signed a contract as creative director and will invest both creatively and financially.
“I believe in it. My commitment is shown in my investment in the company,” she said.
From the first day that DKI announced it had received a takeover offer from LVMH, speculation has mounted that John Idol, chief executive officer of DKI, would leave the company in the event of a completed deal. The 42-year-old Idol, who joined the company in July 1997, is said to have a severance package in place valued between $10 million and $13 million.
Idol’s current salary is $950,000, plus performance bonuses. According to a filing with the Securities and Exchange Commission, as a result of this deal, he gets a $750,000 transaction bonus, provided certain conditions are met, as well as a special performance bonus of $1.25 million. He is also entitled to receive up to $50,000 in outplacement services for a period not to exceed one year commencing when his employment is terminated.
Sources have also speculated that he might be headed to Nautica, where he would head up the John Varvatos business. Also, sources said on Monday, severance packages could be in the works with some of Donna Karan’s divisional presidents, valued at three times their annual salaries, as an incentive for LVMH to keep them.
Reports continue to circulate that Denise Seegal, former president of Liz Claiborne Inc. and a former president of DKNY, might assume a top managerial role in the new Karan organization.
Carcelle declined to comment on specific plans for Donna Karan vis-a-vis leadership and restructuring, saying LVMH will not officially assume control of management of the brand until the deal clears regulatory and other hurdles. The deal, which is expected to close in the third quarter, is subject to approval of DKI shareholders, government approval and other customary conditions.
“For the moment, we can only brainstorm,” he said.
Pino Brusone, an LVMH executive who is extremely friendly with Karan, has been cited in these columns as a likely successor to Idol. Carcelle said Brusone, formerly managing director of Giorgio Armani SpA, is currently chairman and chief executive of Gabrielle Studio, but declined to comment on any future role for him.
Idol declined to comment on any developments regarding his employment at DKI, saying only that “I’m currently the ceo of the company and I intend to remain here until such time as something changes.
“I am here, focused on continuing to run the business and to meet our strategic objectives,” Idol added.
Carcelle rebuffed suggestions by analysts and other observers that LVMH might have bought another fixer-upper.
“This company is not losing money and it doesn’t need a complete turnaround,” he said. “For example, only 30 percent of sales right now are outside the U.S., which is very small compared to other brands we control. Between international expansion, the expansion of the directly controlled retail network and development of accessories categories, we have three very strong growth areas for the company.”
Carcelle also said the large number of licenses is not a cause for concern, reiterating that LVMH is not married to one formula for its various properties.
“We believe the system of licensing can exist with a certain number of directly controlled operations,” he said. “Of course, we will study [the licenses] very closely.”
Karan’s largest licensees are Liz Claiborne for DKNY Jeans, Activewear and CITY DKNY, and Estee Lauder for cosmetics. The company also has licenses for outerwear, hosiery, intimate apparel, home accessories, eyewear and children’s apparel.
As he has said before, Paul Charron, chairman and ceo of Claiborne, said Monday, “We see these acquisitions as very positive steps for all concerned. LVMH is the world’s premier marketer of luxury brands, and its strategy of building a powerful portfolio of names is consistent with our own multi-brand, multi-channel, multi-geography strategy.”
In addition to his role in orchestrating negotiations with LVMH, Idol said the company has been focused on its international business, its retail development and on finishing plans for its two new stores in Manhattan — a Donna Karan shop on Madison Avenue and a DKNY site in SoHo. Both of those units have had construction delays and their openings have been pushed back to late summer.
“The special committee of the board worked very hard to get what it believed was the appropriate value for the shareholders,” Idol said. “They were very clear and succinct in that objective, and not willing to compromise until the offer reached what they believed was the appropriate price.”
Idol said LVMH offers some potential benefits to Donna Karan in reaching the company’s expansion goals.
“Number one, they’re certainly going to help us to expand our freestanding retail strategy,” Idol said. “Number two, clearly, they have a very strong international presence, in Europe, Japan and Asia [35 percent of LVMH’s sales come from outside the U.S.]. Lastly, they have an outstanding production and product development operation around the luxury leather and handbag businesses.”
One of the clear changes that would be made at the company under LVMH’s ownership would be to place a major emphasis on the Donna Karan brand and the luxury side of the company. Idol said LVMH sees potential in DKNY, too, and supports the development of both labels as distinct brands.
Idol also predicts a fast acceleration of freestanding stores for the brand, increasing from roughly 13 globally to well over 150 over the long term.
There are 181 stores affiliated with the Donna Karan brands worldwide. Of them, 73 are company owned, with 18 of those focused on full-priced sales, while the remaining 55 are outlets. Another 108 stores are licensed internationally, including 91 full-priced stores and 17 DKNY Jeans outlet stores.
For her part, Karan said, “I have always admired LVMH and the environment it has created for designers in supporting their creativity, emphasizing their individuality, respecting their brands and providing the resources to develop global luxury businesses.”
Asked if any personnel changes were planned in the immediate future, Karan said, “We’ll all sit down and look at the future of the company. There’s a reason they purchased the company because of what it does. It’s going to evolve. It’s a credible company because of its people,” she said.
“It’s important for all my people to understand that LVMH runs each company autonomously. Each is uniquely individual. Christian Dior looks like one thing, and Givenchy has made its own signature. That for me, I find most appealing,” she said.
One of her priorities is to open more freestanding stores, which she believes will benefit her business in department stores.
“Department stores say their business excels when there’s a full image of the brand that’s shown. It builds consumer awareness.” She said her flagship at 819 Madison Avenue here, slated to open in August, will represent the Donna Karan lifestyle in its totality. “It will mark how wonderful it will be. It’s 17,000 square feet and three floors,” she said.
Also high on her list are expanding her accessories, beauty and home businesses, and maybe some day opening up a spa — another of her passions.
The DKI acquisition provides LVMH with an important foothold to expand into the American fashion market. LVMH already holds one-third minority stakes in the fashion houses of Michael Kors and Marc Jacobs, who design for LVMH houses Celine and Louis Vuitton, respectively. However, Karan will be the first American fashion house to be completely anointed by the French luxury goods firm.
“There’s a reason for the marriage of the two companies,” said Karan. “I don’t want to say that I own New York, but it’s not a bad logo,” referring to her Donna Karan New York trademark.
Karan also said over the past year she’s gotten to know Carcelle and his wife. “They’re very refreshing. He’s a wonderful guy. It was great having him at my show.”
Karan also believes the LVMH deal will bring improvements in quality and timely deliveries.
“I pray to God we can improve quality. I’m so looking forward to their support in that respect. They have standards,” said Karan.
As for timely deliveries, which has been a sore point for the company, Karan quipped, “I believe I’m the only designer shipping on time. When my merchandise arrives, it’s fresh and it sells at full price, where everyone else’s [which got there early] is marked down…..I’m on time…it depends on which time zone you live in.”
Turning serious, she said she looks forward to working with the other LVMH divisions, and perhaps collectively they can change the entire delivery schedule to coincide with when consumers actually wear the clothing — a topic she’s been talking about for years.
She also said her international business is very successful, and her product is desired overseas. “They’ll realize that dream,” she added. “DKNY has just begun what it can do. It’s really appreciated in Europe. LVMH does tremendous business in Asia, and they’ll be able to build the business.”
Karan said the apparel business has undergone dramatic changes since she launched her company in 1984.
“Business is more difficult today than when we started. We’re dealing in a global business. You just can’t design a product. It’s just not a name anymore. It’s about a price-to-value relationship. Hopefully we’re giving the customer products that she’ll think, ‘Oh, she’s more than just a great pantyhose designer.’ People come up to me all the time and tell me they’re wearing my pantyhose,” she added.
Karan believes she’ll enjoy operating as a division within a publicly traded company, rather than being on her own in the public sector, “when all eyes are on you.”
While Karan’s firm hasn’t had an easy time being public, the designer acknowledged that the market has changed greatly since she went public in 1996. “Everything in life is a lesson. I never would have known what it was like. I’ve experienced entrepreneurship. I’ve had many experiences. I knew at some point it would happen,” said Karan, referring to the option of being swallowed by a big conglomerate.
As for how the other shareholders might feel, Karan said, “I would imagine they’d be ecstatic.”
Perhaps some of Karan’s charter shareholders might not be so happy; DKI went public in June 1996 at $24 a share.
Shareholders representing approximately 42 percent of the outstanding DKI shares, including Karan and Weiss, have entered agreements to vote in favor of the merger. Merrill Lynch & Co. acted as financial adviser to the Special Committee of DKI’s board of directors. Goldman, Sachs & Co. acted as financial adviser to LVMH, and Credit Suisse First Boston acted as financial adviser to Karan and Weiss.
Karan pointed out that this deal never would have happened had it not been for her husband.
“He had a vision when we started Donna Karan. He created this. Stephan definitely steered the ship on this,” said Karan.
And how are they going to celebrate?
“I’m going to Parrot Kay next week to a yoga retreat. And we’ve been working on resort and spring . The show must go on. It’s basically business as usual.”
Karan acknowledged there will be more pressure, “But it’s exciting pressure. I only see this as a huge opportunity.”